SECTION 18(6) OF THE CGST ACT READ WITH RULES 40 AND 44

[SOPL SOPL]

Dear Sir

At the time of supply of capital goods on which input tax credit is taken, do we need to comply both the conditions i.e paying tax on transaction value and reversing input tax credit for remaining useful life of the asset (reducing total input by 5% per quarter)

or

is it sufficient to pay any one i.e higher of the above two conditions.

In CGST Act, 2017 ,it is clear if we pay higher of the both conditions.

Kindly provide your reply with analysis quoting circulars, clarifications , advance rulings if any.

[Amit Agrawal]

Said Section 18 (6) reads as follows:

"In case of supply of capital goods or plant and machinery, on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher:

Provided that where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the taxable person may pay tax on the transaction value of such goods determined under section 15."

Rule 40 (2) of the CGST Rules, 2017 reads as follows:

"The amount of credit in the case of supply of capital goods or plant and machinery, for the purposes of sub-section (6) of section 18, shall be calculated by reducing the input tax on the said goods at the rate of five percentage points for every quarter or part thereof from the date of the issue of the invoice for such goods."

My understanding from above section and rule:

A. One needs to pay GST and need not reverse any ITC as per Section 18 (6) read with Rule 40 (2).

B. Quantum of gst payable is "the input tax credit taken on the said capital goods or plant and machinery reduced at the rate of five percentage points for every quarter or part thereof from the date of the issue of the invoice for such goods" OR "The tax on the transaction value of such capital goods or plant and machinery determined under section 15", whichever is higher

C. Calculation of GST payable - as mentioned in Para B - does not apply when 'refractory bricks, moulds and dies, jigs and fixtures' are supplied as 'scrap'.

Now, let's read Rule 44 (6) which is as follows:

"The amount of input tax creditfor the purposes of sub-section (6) of section 18 relating to capital goods shall be determined in the same manner as specified in clause (b) of sub-rule (1) and the amount shall be determined separately for input tax credit of central tax, State tax, Union territory tax and integrated tax:

Provided that where the amount so determined is more than the tax determined on the transaction value of the capital goods, the amount determined shall form part of the output tax liability and the same shall be furnished in FORM GSTR-1."

My understanding of said Rule 44 (6):

I. Even though heading of Rule 44 is 'Manner of reversal of credit under special circumstances', sub-rule (2) talks about determination of ITC for the purposes of sub-section (6) of section 18 and as said before, Section 18 (6) does not talk about 'ITC reversal' but talks about liability to pay GST at the time of supply of capital goods.

II. Proviso in sub-rule (6) of Rule 44 makes it more clear that it is dealing with the quantum of GST payable at the time of supply of capital goods and NOT talking about ITC to be reversed.

LASTLY:

There seems an apparent dichotomy between Rule 40 (2) and 44 (6). To avoid disputes / litigation etc. and till better clarity emerges through Board circulars / court rulings, it is better to pay taxes on higher side (i.e. 'Taxes calculated as per Section 18 (6) read with Rule 40 (2)' OR 'Taxes calculated as per Section 18 (6) read with Rule 44 (6)' whichever is higher). This is more so when the buyer is eligible to avail ITC against taxes so charged.

In any case, one needs NOT reverse any ITC as paying taxes against supply - as suggested above - is sufficient compliance with legal provisions in my view. In other words and in my view, 'paying such taxes at the time of supply of capital goods' is nothing but 'ITC reversal as envisioned in these rules' and there is no need to make such payment / reversal twice.

All above are strictly personal views of mine and the same should not be construed as professional advice / suggestion in any way.

[Ganeshan Kalyani]

Either reversal of ITC or payment of tax on transaction value is required to be complied and not both.

[Shilpi Jain]

Agree. Any one only has to be complied with.

Why has this doubt cropped up?

[Amit Agrawal]

Dear learned fellow panelist/s,

Having two rules - both quoting Section 18 (6) - makes my mind confused. Request you to throw more light about interplay between Rule 40 (2) & 44 (6) and how things will be eventually played in disputes & litigation.

Thanks and regards,

[Amit Agrawal]

My question above is purely from point of view of 'how to calculate liability to pay GST u/s 18 (6)?'. On basic issue raised, as explained in my first post above, I agree with your views that there is no question of making double payments (i.e. payment against supply as well as reversal of ITC - both - are not required).

[Rajan Atrawalkar]

In the case of supply of capital goods, both the sections will come into picture. Section 9(1) as well as section 18(6). Because both are independent sections and does not refer to each other. Section 9(1) is a charging section which applies to all supplies and one cannot escape from it if there is a supply as per section 7. The value will be determined as per section 15. While calculating value u/s 15 , it does not provide any deduction as calculated u/s 18(6) . So, forward tax on full value is leviable u/s 9(1). Now , section 18(6) does not have any overriding effect on section 9(1). Again, the rule 44 talks about reversal of credit and not levy of tax on forward basis. So, technically, both the sections will come into picture. Though it is a double taxation on the single transaction. This should not be the intention of legislature, but as on today, there is no escape.

[Shilpi Jain]

Levy can happen as per section 9 of CGST Act. The valuation happens as per s 15 read with rules. In the same way s.18 can be looked only at the most as a valuation mechanism and not a credit reversal method.

Also section 18 does not talk of reversal of credit, it only says payment of tax amounting to the value of credit.

How can there be 2 times tax on one supply? The taxable event is supply. So on sale of asset if there is one supply then there can be only one tax.

[Rajan Atrawalkar]

Take an example: JCB is purchased in the month of April , capitalized and full ITC availed. In the next month it is given on Rent/Lease. To me, 18(6) is attracted , as the word used is "Supply" , and supply includes " sale, transfer, barter, exchange, licence, rental, lease or disposal ....." . So, whole of the ITC needs to be paid back. Now, one need to pay forward tax on the Rent received u/s 9 also. There is no such concept of "either of the two". Rental or Lease is a continuous process , may for few years together. So, one needs to pay GST on Rental receipts continuously. If only one tax is to be paid, then which tax needs to be paid , say for the month of May will Tax equal to ITC is to be paid or Tax on Rental receipts?

Regarding the question "How can there be 2 times tax on one supply?". Yes, the good example is Mohit Minerals. They had to knock the doors of courts to decide it ultra vires.

[Rajan Atrawalkar]

One more aspect in the previous example. If after certain usage, the JCB is destroyed say due to accident, then section 17(5)(h) will be hit and ITC will be required to be reversed. "Goods" is wider term than "Capital Goods" . 17(5)(h) uses the words "Goods".

[Amit Agrawal]

(Re-posting my last post, with improvements in drafting. Apology for the inconvenience!)

W.r.t. post No. 8 above, my views are as under:

A. While supply includes "sale, transfer, barter, exchange, license, rental, lease or disposal .....", 'Supply of goods' (i.e. goods includes 'capital goods' in the context of Section 18 (6)) cannot be equated with 'Supply of Services.

B. GST law levies tax on supply of goods or services or both. But, it does not mean that there is NO difference between 'goods' and 'services' in the GST law. GST law actually defines goods and services separately and services exclude goods.

C. Rental or Lease of goods is 'Supply of Services' and not 'Supply of Goods'. Hence, provisions of Section 18 (6) (which is for 'Supply of Capital Goods' and goods includes capital goods) cannot gets attracted to the activities of 'Rental or Lease of Capital Goods' in my view. Thereby, Rule 40 (2) & 44 (6) will not come into picture at all against supply of 'Rental or Lease of Capital Goods'.

All above are strictly personal views of mine and the same should not be construed as professional advice / suggestion in any way.

[Amit Agrawal]

W.r.t. post No. 9 above, my views are as under:

A. If a capital goods is destroyed after usage for some period, applicability of Section 17(5)(h) can be controversial & debatable, specially when there is NO mechanism prescribed for proportionate reversal of ITC.

B. In any case, there cannot be a supply of capital goods (to be covered u/s 18 (6)) when they are destroyed. So, this is also not a case where there are two taxes on single transaction, in my view.

All above are strictly personal views of mine and the same should not be construed as professional advice / suggestion in any way.

[Amit Agrawal]

Dear Shri Rajan Atrawalkar Ji,

Request for your counter argument please.

[Amit Agrawal]

I wish to also clarify the followings:

This is not a case where one needs to do either reversal of ITC or pay the tax on the subject transaction under discussion.

This is simply a case about quantum of 'tax payable' against outward supply of capital goods and there is no question of any ITC reversal by the tax-payer in my humble view.

I explained my rationale behind my views & its potential benefits to the tax-payer at Post No. 2 of Issue-ID - 118006 .

All above are strictly personal views of mine and the same should not be construed as professional advice / suggestion in any way. And I fully respect contrary views.

[Amit Agrawal]

Correction: I explained my rationale behind my views & its potential benefits to the tax-payer at Post No. 3 of Issue-ID - 118006

[Amit Agrawal]

Dear Shri Rajan Atrawalkar Ji,

Request for your counter argument please.

AI Summary

Tax on supply of capital goods: pay the higher of the ITC based amount or the tax on transaction value. Section 18(6) requires payment on supply of capital goods equal to ITC taken reduced by prescribed percentage points over time or the tax on the transaction value, whichever is higher. Rule 40(2) sets the time based reduction method and Rule 44(6) prescribes determination of the ITC component and mandates that where that amount exceeds tax on transaction value it be included in output tax liability and reported. Forum commentary records disagreement whether both forward tax and the special computation apply or only the higher calculation must be paid; conservative practice is to pay the higher amount and treat that as satisfying any reversal concern.